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Claimant sells securities linked to ICSID award

GLOBAL ARBITRATION REVIEW, SEBASTIAN PERRY, OCTOBER 28, 2011

In a new twist on third-party funding of international arbitration, Canadian mining company Crystallex is selling securities worth US$120 million linked to the proceeds of a future ICSID win against Venezuela.

Crystallex hopes to place up to 120,000 five-year senior secured notes, each with a face value of US$1,000. Each note will be accompanied by a contingent value right, or CVR, entitling the bearer to a percentage of any award or settlement resulting from the company's US$3.8 billion ICSID claim against Venezuela.

The placement, which is scheduled to close today, is principally an effort by Crystallex to avoid default on US$100 million in unsecured notes due in December. The rest of the proceeds will go towards "general and corporate purposes" - including, GAR understands, the funding of the arbitration itself.

Freshfields Bruckhaus Deringer, which is acting Crystallex's counsel in the ICSID case, is understood to be managing a data room for interested purchasers, who are required to sign a non-disclosure agreement before they can receive access to the offering document. Macquarie Capital, GMP Securities and Byron Capital are acting as co-lead agents for the offering.

Crystallex is said to be offering a return of 35 to 40 per cent of the arbitration proceeds.

"To my knowledge, there hasn't been a public issue of securities linked to litigation proceeds since the Dime Bancorp litigation-tracking warrants linked to claims emanating from the US savings and loan crisis in the 1980s," says Mick Smith, partner and co-founder of commercial litigation funder Calunius Capital in London. He says that while CVRs are normally used in the context of M&A transactions, their use in an arbitration context is "very imaginative".

Selvyn Seidel, founder and chairman of funder Fulbrook Management in New York, says the use of such financial instruments in litigation funding potentially opens the door to a new raft of investors.

"Before now you would see perhaps one to three [funders] putting a great deal of money into an ICSID case, whereas this kind of bundled instrument expands the field and brings in investors who may only be comfortable putting in a small amount. To the extent it legitimately expands the opportunities for investment, it's to be welcomed."

Crystallex brought its claim against Venezuela in February after the cancellation of its operating contract for Las Cristinas, an enormous gold deposit in the southeast of the country, in which it had already invested US$300 million. As the contract was Crystallex's principal asset, the company has faced financial difficulties ever since. In April the New York Stock Exchange delisted the company on the ground that it had "substantially discontinued the business that it conducted at the time it was listed."

Last month Crystallex defeated a second lawsuit by disgruntled noteholders, who argued before Ontario's Superior Court of Justice that the mine's expropriation was a 'project change of control' that could trigger immediate payment of the notes.

Smith says the placement shows "an epic capital-markets tussle being played out by bondholders and shareholders for a huge prize, the potential spoils of the claim against Venezuela."

Meanwhile the ICSID case has yet to reach the preliminary hearing stage. A tribunal was formed to hear the case last month, chaired by Brazilian-Swiss arbitrator Laurent Lévy. Another ICSID claim against Venezuela over the same mine - filed by its previous operator, Vannessa Ventures - is still pending, seven years after it was first registered.

Crystallex declined to comment until after the placement is complete.

CRYSTALLEX INTERNATIONAL CORPORATION V. BOLIVARIAN REPUBLIC OF VENEZUELA (ICSID CASE NO. ARB(AF)/11/2)

Tribunal

Laurent Lévy (Brazil/Switzerland) (president)
John Gotanda (US)
Florentino P Feliciano (Philippines)

Counsel to Crystallex

Freshfields Bruckhaus Deringer
Partner Nigel Blackaby in New York
Travieso Evans Arria Rengel & Paz in Caracas
Wallis & Guerrero in Caracas

Counsel to Venezuela

Procuraduría General de la República in Caracas
Foley Hoag
Partner Ronald Goodman in Washington, DC

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